Forget the Crystal Ball: Consistent Investing Wins Every Time

Hey there Money Saver! Welcome back to another week of How to Save A Buck, where we explore ways of saving money in personal finance, credit cards, and investing!

The stock market's recent upswing of nearly 15% from the October lows has everyone feeling like the Grand Showcase winner on the Price Is Right. But before you bet everything on that vacation to Hawaii, let's talk consistency.

While the market's yearly and recent gains are exciting (24% YTD), it's the slow and steady investors who reap the rewards.

The stock market is like a delicious, multi-course meal. Day traders are frantically shoving appetizers in their mouths, hoping for a quick sugar rush. The real gourmands, the consistent investors, are savoring each bite, enjoying the full symphony of flavors, and trusting the chef (aka, the market) to deliver a satisfying experience.

And guess what? They walk away feeling full and happy, while the appetizer hoarders are left with acid reflux and regret.

Here's why consistent investing, not market timing, is the secret sauce to long-term success:

1. Dollar-Cost Averaging: Your Anti-FOMO Potion

Remember that time you FOMO'd into Bitcoin at its peak and then watched it plummet? Yeah, not a good look. Dollar-cost averaging (DCA) is your knight in shining armor here. Instead of dumping all your money in at once, you invest a fixed amount regularly. This way, you buy more shares when prices are low and fewer when high, smoothing out the inevitable market bumps and dips.

Studies show DCA can significantly outperform market timing:

• A 2020 Vanguard study found that over 20 years, a consistent investor using DCA outperformed 80% of market timers.

• A 2015 Schwab study showed that DCA investors in a volatile market earned up to 23% more than market timers.

Even if you believe you can enter the market at a good point (whatever that is), a recent study found that active traders in the US underperformed the broader stock market by an average of 6.5% per year. And less than 10% of day traders continue after 5 years.

So, ditch the crystal ball and embrace the DCA. It's like a magic potion that turns market volatility into your friend, not your foe.

2. Compound Interest: The Slow and Steady Snowball

Ever heard of the snowball effect? It's when something small and insignificant gathers momentum and turns into an unstoppable force. Compound interest is the financial equivalent of that snowball. Your investments grow over time, earning returns on your initial investment and on the earned returns. This is as passive as it gets!

The earlier you start investing, the more time your money has to snowball. Let's say you invest $1,000 at 7% annual return:

• 5 years: You'll have ~$1,369

• 10 years: You'll have ~$1,898

• 20 years: You'll have ~$3,797

That's over $2,800 more just for starting 10 years earlier! So, even if you can only afford a small amount now, start today. That snowball will be a monster before you know it.

3. Time is Your Greatest Ally

The stock market has been around for a few hundred years and will likely be around for a few hundred more. You have time on your side. The longer you invest, the more likely you are to ride out market downturns and come out ahead.

Think about it this way: a 20-year market downturn is incredibly rare. Historically, the market has averaged a 7% annual return over the long term. So, even if you hit a few rough patches, time will be propelling you toward financial freedom.

Remember:

• Consistency is key: Invest regularly, even if it's just a small amount.

• DCA is your friend: Don't let FOMO control you. Smooth out the market bumps with consistent investing with regular or automatic contributions.

• Compound interest is a superpower: Start early and let your money snowball.

• Time is your greatest asset: Don't panic sell during downturns. The market rewards patience.

So, put down the crystal ball, invest early and often, and embrace the slow and steady climb to financial freedom. The market may not be as exciting as betting $1 on the Grand Showcase and winning, but with consistency and time as your ally, you can build wealth that exceeds anything you imagined.

Just don’t expect to win the Hawaii vacation every time.

Save On,

Chris